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“With this acquisition, SAP is going to be the leader in on-demand supplier relationship management, or SRM,” SAP co-CEO Bill McDermott said in a conference call late Tuesday.

Ariba, based in Sunnyvale, Calif., will become a separate subsidiary of SAP under the proposed terms of the deal, according to McDermott.

The $4.3 billion Ariba acquisition will give SAP customers access to the Ariba Network’s 730,000 members, providing them a “closed-loop” source-to-pay process, according to SAP. Companies will be able to access the network via on-premises and cloud environments, as well as a combination of the two. Ariba operates primarily on a Software-as-a-Service model. The network will remain accessible to companies using other ERP systems, such as those made by Oracle and Microsoft, and not limited to SAP customers.

Expansion on the horizon for SAP cloud, SAP on-demand offerings

The move comes just months after SAP purchased SuccessFactors, a San Mateo, Calif.-based maker of on-demand HR applications, for $3.4 billion.

McDermott said the Ariba Network is expected to grow to one million members in 2012, part of an overall procurement market in which business spend an estimated $12 trillion globally with their suppliers. Only $319 billion of that amount is conducted within Ariba’s network, which suggests the potential for significant growth, McDermott said.

“As SAP’s customers make up the majority of the global 2000, we have the unique opportunity to significantly expand this business, McDermott said.

For more on SAP and the cloud

Last week at Sapphire, during his keynote presentation, co-CEO Jim Hagemann Snabbe described the future of computing and applications, which included what he called, "the intelligent business web," an Internet for business not consumers.

Market reaction to SAP Ariba acquisition

Response to the announcement was mixed.

Acquisitions like this one, including IBM’s purchase of sourcing software vendor Emptoris, ultimately remove customer choice, said Duncan Jones, an analyst with Cambridge, Mass.-based Forrester Research Inc. who covers the procurement market.

“I don’t see how customers of either vendor benefit. The transaction doesn’t magically create integration between SAP's various ePurchasing solutions and Ariba's offering,” Jones said. “[SAP co-CEO] Jim Hagemann Snabe said that SAP customers will immediately benefit from the business network by bringing their purchase volume to the network. That's simply untrue. SAP customers may or may not want to use Ariba. If they wanted to use it, they could already.”

Jones said that although SAP has a number of great innovations within its SRM portfolio, it also tends to bring those applications to market before they’re ready. “It can get away with this as a perpetual license vendor, but it’s got to change its ways to be a SaaS [Software as a Service] vendor like Ariba. SaaS vendors have to deliver value and customer success, or they don’t get renewals,” Jones said.

Many suppliers complain about the high cost of using Ariba, Jones said, adding that SAP needs to address that issue or risk losing those customers to cheaper alternatives.

The SAP-Ariba acquisition also raises a number of integration issues, according to Bill McBeath, chief research officer of ChainLink Research Inc. based in Newton, Mass.

“There is a fair amount of overlap in SAP’s current SRM portfolio [which is on-premises] and Ariba’s [on-demand] capabilities,” McBeath said.

“One question is whether they keep both sets of solutions separate or do some rationalization. Which parts of SAP’s portfolio, if any, will be absorbed into Ariba’s platform and what will the integration of Ariba into SAP’s portfolio look like,” McBeath said.

McBeath also said that SAP’s goal of bringing HANA in-memory analytics and speed to the network was intriguing, but he questioned some of SAP’s other claims about future functionality.

“They mentioned the opportunities for using HANA to provide supercharged analytics for Ariba. I think there is a lot that could be done with that combination,” McBeath said. “[But] they also mentioned more than once that SAP would leverage Ariba’s platform for supply chain optimization.”

The problem with that, McBeath explained, is that supply chain optimization usually refers to functions such as inventory optimization, network planning and optimization, advanced planning and scheduling, and transportation optimization, none of which Ariba currently covers.

“Either they were using the term loosely and just meant supplier collaboration, or they intend a new set of capabilities and direction that Ariba has not done in the past,” McBeath said.

Despite the questions, SAP will likely make the most of the acquisition, he added.

“If I’m a competitor of Ariba, it’s too early to tell what this means, but I’d be nervous,” McBeath said. “Yes, there will be distraction for Ariba during the integration phase. But having the muscle and customer base of SAP could be powerful. Time will tell if they are able to realize those synergies.”

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